The Economics of Grants and Exchange: The Transactions Matrix

By Brown, Alan A.; Horvath, Janos et al. | American Economist, Fall 1998 | Go to article overview

The Economics of Grants and Exchange: The Transactions Matrix


Brown, Alan A., Horvath, Janos, Neuberger, Egon, American Economist


Introduction

The purpose of this paper is to encourage cross-fertilization between Grants Economics and other fields of economics. It continues the evaluation of the contributions made to economics by Grants Economics explored in an earlier paper in this journal (Brown and Neuberger, 1986). Grants Economics is that subfield of economics that focuses on an important subset of transactions - grants or one-way transfers. Grants Economics, as Tibor Scitovsky has said, "in the best orthodox tradition of economics . . . makes perfect competition the pivot around which everything else revolves; but by speaking of grants instead of distortions or divergences or exploitation, it stresses the neutrality of perfect competition from the distributional point of view. Indeed, the use of the word "grants" in this context stresses that it may be desirable to have an income distribution different from the perfectly competitive one" (Scitovsky, 1976, p. 78).

The treatment of all transactions in the economy, but with special emphasis on grants, distinguishes Grants Economics from traditional economics which concentrates on exchange transactions. Grants Economics also helps to identify critical nonexchange components of transactions that might have been regarded as pure exchange transactions.

In order to pursue these goals, grants economists have constructed theoretical frameworks and provided empirical methodologies to analyze case studies. In this paper, we stress the following aspects of all transactions: (1) what is the nature of the transaction, (2) transactions carried out by decision-makers in order to highlight the grant and exchange elements in each transaction.

This paper presents a theoretical framework of Grants Economics, discusses its place in economics by means of a taxonomic matrix of all types of transactions, and considers some interesting theoretical issues.

Theoretical Considerations

Traditionally, economics has focused on the decision-making approach to answer three basic questions: what to produce, how to produce, and for whom to produce. In answering these questions, economists have generally used two narrowing conceptions: (1) that the relevant decision-maker is the "economic man," who is rational and motivated only by self-interest: and (2) economic interaction is typified by market exchange. Hirschleifer (1985) in "The Expanding Domain of Economics," discusses how this narrow approach to economics has been changing. By stressing nonexchange transactions, Grants Economics has been one of the fields of economics most active in trying to broaden our view of economic man. Founded in 1968, Grants Economics was by 1974 already included in a volume commissioned by the American Economic Association as one of the "Recent Advances in Economics" (Fels and Siegfried, 1974, pp. 181-191).(1)

As for the concept of the "economic man," Grants Economics accepts many different types of motivations: benevolence (altruism) and malevolence, love and fear - as well as self-interest. Looking solely at exchange transactions gives us only a partial view; to get a broader perspective, Grants Economics attempts to illuminate the significant role played by nonmarket transactions in furthering social interaction.

It should be noted that the word "grant" in Grants Economics is used in a much broader, more generic sense than is implied by the process of giving or receiving foundation grants.

This broader meaning of "grants" is noted by Abram Bergson: "My impression is that there is a rather general agreement among those who have given serious thought to this matter regarding the meaning of one type of grant, a major type of grant, that has come to be called an explicit grant. I think it is understood that this is a unilateral transfer of material values and as such is to be distinguished from the bilateral, reciprocal transfer of material values which is generally characteristic of the exchange economy and which we usually identify with the exchange economy" (Bergson in Pfaff, 1976, p. …

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